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JPMorgan Boosts Litigation Reserve by $7.2B, Wiping Out 3Q Profit

Stocks in this article: JPM

NEW YORK (TheStreet) -- JPMorgan (JPM) is boosting its litigation reserve by $7.2 billion after taxes, as the nation's largest bank by assets braces for a set of costly legal settlements with regulators on activities the bank and its acquired units such as Washington Mutual and Bear Stearns made during the housing boom.

JPMorgan's multi-billion dollar addition to its legal reserve wiped out the firm's third-quarter profit and signals that CEO Jamie Dimon may be working on a settlement to resolve most of the outstanding legal liabilities of the bank.

JPMorgan said in a presentation appended to its earnings that since 2010 it has added $28 billion to its legal reserves, offset by a $8 billion reduction attributable to settlements and legal judgments. Overall, reserves for litigation have cost the bank approximately $23 billion in net income over that time span.

JPMorgan reported a third-quarter loss of $400 million, or 17 cents a share, on revenue of $23.9 billion. That loss was attributable to $9.15 billion in pretax expense and $7.2 billion in after-tax expense related to a rising provision for the bank's legal expense. The bank, however, also said results included a $1.6 billion pretax benefit from reduced reserves to its consumer and community banking business.

Excluding those one-time items, JPMorgan reported $5.8 billion in net income, or $1.42 in earnings per share, which beat bottom-line profitability estimates of $1.30. The bank's $23.9 billion in revenue fell slightly short of consensus Wall Street forecasts closer to $24 billion, according to Bloomberg data.

"While we had strong underlying performance across the businesses, unfortunately, the quarter was marred by large legal expense. We continuously evaluate our legal reserves, but in this highly charged and unpredictable environment, with escalating demands and penalties from multiple government agencies, we thought it was prudent to significantly strengthen them," Dimon said in a statement.

"The board continues to seek a fair and reasonable settlement with the government on mortgage-related issues - and one that recognizes the extraordinary circumstances of the Bear Stearns and Washington Mutual transactions, which were undertaken at the request or encouragement of the U.S. Government," Dimon added, of the bank's most pressing outstanding legal items.

He warned that litigation costs could be volatile over the next several quarters, but that the expense will abate over time.

JPMorgan shares were gaining about 1.5% in premarket trading to $53.30 following the firm's earnings announcement.

-- Written by Antoine Gara in New York.

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